College Aid Is Corporate Welfare

June 4, 2012

Amidst the debate over whether a temporary 3.4 percent interest rate on federal student loans passed in 2007 should be retained and, if so, how to pay for it, a far more important question has been ignored: who really benefits from the $65 billion-plus that Washington spends each year on student aid, says Andrew G. Biggs, a resident scholar at the American Enterprise Institute.

Recent economic research suggests that colleges siphon off a significant portion of federal education aid rather than lowering costs to students. This is first accomplished by colleges raising institutional tuition in response to their students being eligible for federal assistance.

As the College Board reports, from 2001 through 2011 tuition for public colleges increased by an average of 5.6 percentage points higher than inflation.

Additionally, private college tuitions rose 2.6 percent above inflation over the same period.

Tuition, housing and other expenses at public institutions today tops $21,000 per year, while the figure for private colleges is roughly double that.

In response to rising tuition costs, federal aid such as Pell Grants, work-study programs and tuition tax credits have more than tripled over the last decade, reaching $65 billion in 2011.

Washington also made over $100 billion in subsidized student loans last year.

Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard University found a 75 percent difference in tuition between aid-eligible and ineligible for-profit colleges.

This suggests that colleges that are eligible for aid respond by raising tuition.

Furthermore, there remain numerous other ways in which colleges can take advantage of federally provided aid that are subtler. For example, research shows that colleges respond to aid eligibility by reducing their own aid provided to students.

Turner found that roughly four-fifths of the benefit students receive from tuition tax credits is lost through reduced student aid provided by colleges.

Similarly, Lesley J. Turner, a doctoral candidate in economics at Columbia University, found that institutions managed to capture 16 percent of all Pell Grant aid -- and that this figure rises to 79 percent for selective private colleges.